Modi government’s Moody blues

Published: November 14, 2015 - 17:27

Why the improved World Bank ranking is not the real story while the Moody’s Analytics report is

Mohan Guruswamy Delhi

The last week of October was an interesting week for the Narendra Modi government. On October 28, the World Bank bumped up India’s ranking to 130 out of 189 countries in its ‘Ease of Doing Business’ (EODB) rating. Understandably, this was received by the government as further proof of its success with reforms.

But three days later, on October 31, Moody’s Analytics, the research and analysis arm associated with the well-known credit rating agency, rained on that parade. “While Modi has largely distanced himself from the nationalist gibes, the belligerent provocation of various Indian minorities has raised ethnic tensions,” the firm wrote in a widely publicised report. “Along with a possible increase in violence, the government will face stiffer opposition in the Upper House as debate turns away from economic policy. Modi must keep his members in check or risk losing domestic and global credibility.”

This Moody’s report not only blamed the government for failing to deliver on the promised reforms but also raised questions over its ability to deliver on them by sharply commenting: “Overall, it’s unclear whether India can deliver the promised reforms and hit its growth potential. Undoubtedly, numerous political outcomes will dictate the extent of success.” Though it did not come from the more famous credit ratings agency, this was serious criticism by a leading economic advisory service.

By its own definition, Moody's Corporation is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets. Moody's Corporation is the parent company of Moody's Investors Service, commonly referred to simply as “Moody’s,” which provides credit ratings and research covering debt instruments and securities. A lesser known division, Moody’s Analytics, offers leading-edge software, advisory services and research for credit and economic analysis, and financial risk management. The Corporation, which reported revenue of $3.3 billion in 2014, employs approximately 10,200 people worldwide and maintains a presence in 35 countries.

The Moody’s Investor Service name is synonymous with leadership in monitoring and analysing credit risk worldwide. This Moody’s service provides credit ratings of over 120 sovereign nations, approximately 11,000 corporate issuers and tens of thousands of players in the global financial markets. Moody’s Analytics “helps capital markets and risk management professionals worldwide respond to an evolving marketplace with confidence”. Though only the more famous institution directly determines credit ratings, both divisions influence debt and investment risk ratings of countries and corporate entities. For that reason, even a caution from Moody’s Analytics is not without consequences.

Because the discourse on economic policy is mainly focused on fiscal measures, monetary interventions, welfare programmes and other such highly visible instruments of government action, when an economy does poorly a disproportionate amount of the debate centres on fiscal policy instruments. But the economic lethargy is more often than not a consequence of the overall administrative eco-system that determines how easily a business can be started and closed, the efficiency with which contracts are enforced, and the rules of administration pertaining to a variety of activities—such as getting permits for electricity and doing the paperwork for exports and imports.

Recognising that these have more bearing on an economy’s progress than other, more visible, policy instruments, the World Bank has been focusing on EODB standards. Thus, the standing on this index also has a major impact on a country’s ability to attract investment. India, given its cumbersome bureaucratic processes and endemic corruption, has been striving to clamber upwards on this index.

But how the government responded to these two judgements is very interesting. It reacted to the Moody’s Analytics reprimand with a statement issued by the Press Information Bureau dismissively saying: “The government notes with distress that the personal opinion of a junior analyst was passed off as a commentary on India by a rating agency by the media to buttress the narrative it wants to portray.”

The fact is that most of the analysis, whether in Moody’s or the World Bank or even the CIA, is done by the gnomes who dwell in the lower warrens. It is they who track countries and corporations with the singleminded purpose of giving their clients, both in-house and outside, inputs often deemed critical in decision-making.

Then the government tried to split hairs, saying “readers were not informed” about the difference between Moody’s Analytics and Moody’s Investor Services. It was as if the value of the opinion of the two Moody’s services is dependent on the front office nameplate.

Figuratively speaking, killing the messenger for bringing unpleasant news has become no less common since Shakespeare first coined the phrase in Antony and Cleopatra. The modern version, of course, is to blame the media. However, as well-known American press lawyer Bruce Sanford puts it, “Shooting the messenger may be a time-honoured emotional response to unwelcome news, but it is not a very effective method of remaining well-informed.”

In contrast, the government reacted to the World Bank’s EODB rating with exaggerated elation and sketchy command of the facts. Speaking for the government, Amitabh Kant, the Secretary, Department of Industrial Policy and Promotion (DIPP), said: “We have reversed the trend by moving up and no country has moved 12 spots in a year. Major reforms are going to kick in from next year, which will further improve our position. We are absolutely confident of being in the top 50 in three years as per the target set by the PM.” Some of that elation was justified. If India continues to move up the rankings at the current pace, it may soon break the top 100. But the government, and Mr Kant, got one significant fact wrong. India had not jumped 12 places in the index under Mr Modi’s leadership. Under the BJP’s leaderhship, it had gained four places. It had moved up eight places, from 142 to 134, during the last year of the United Progressive Alliance government.

Kant’s mistake cannot be glossed over as mere clerical error. Besides, clerks don’t make such errors.

It’s also hardly clear that the improvement represents a wholesale change in the environment.

The EODB classification depends on 10 indicators ranging from registering a business, getting construction permits, registering property, getting bank credit and getting electricity. In five of these categories, India’s position remains unchanged. It worsened when it comes to getting credit and paying taxes. It only improved from 184 to 183 in getting construction permits, and from 164 to 155 on starting a business. The big jump took place in ease of getting electricity, which leapt from 99 to 70, contributing hugely to the improvement of the overall index.

During the fiscal year 2014-15, the electricity generated was 1,030.785 billion KWh with a shortfall of requirement of 38.138 billion KWh (-3.6%) against the 5.1% deficit anticipated. In a May 2015 report, India's Central Electricity Authority anticipated the 2015-16 base load energy deficit and peaking shortage to be 2.1% and 2.6%, respectively. The marginal deficit figures clearly reflect that India will become electricity-surplus during the 12th Five-Year Plan period.

The fact that demand is now almost flat for electricity and a mounting list of 57 thermal power units across the country have shut down as a result detracts from the apparent industrial revival story. Clearly, the overall electricity situation has been on the mend for much longer than the previous year, and the government should now be more concerned about the slowdown in demand.

The Modi government does not see government as a continuum and wishes to appropriate what is not entirely its due for itself. We are well into the second year of the Modi government’s term. It is high time it looks at its tenure more rather than just reaching into the past to garner credit for now.